sexta-feira, maio 18, 2012

Submerging in the Eurozone tsunami, look to Iceland

It was a pleasure being  in Stockholm this week and thinking about emerging markets, for a change.
 Back home in Lisbon, we feel more like we are “submerging”…

Now we hear of the real the threat of bank runs, which can be seen as the measure of the mismanagement of the intra-Eurozone debt crisis.  

First, the foreign bank creditors and investors, whose excessive lending  made possible the excessive borrowing,  were mostly saved and have been allowed to reduce their exposure sharply since 2009, being paid out from the bailout funds, the ECB funding and TARGET2 balances. 
No real efforts were made to extend maturities on external debt, to stabilize export finance, etc.  
Recapitalization of the large European banks in order to absorb eventual losses hardly went beyond the discussion stage.

Then, borrowing countries were demonized,  and local  depositors and local investors were sacrificed with the CAC-Collective Action Clauses, instead of having the benefit of  protection from reinforced  deposit insurance schemes, as is urgently needed to promote local savings. 
Capital flight is the predictable consequence of such failures to protect retail depositors and savers. 

We may wish look to Iceland (see  presentation by Mr Gudmundsson) to learn about best practices in external debt management. The Icelandic model includes: 
0. A sizable devaluation 
1. Segregate and secure local retail deposits with a credible deposit guarantee. Icelandic legislation was amended so that (local) depositors would get priority over other general creditors in the case of the winding-up of a bank, although the Deposit Guarantee Directive (94/19/EC) banned such positive discrimination
2. Let external and wholesale funding, including bondholders,  take losses,  if necessary, especially if external emergency funding is not forthcoming 
3.  Segregate, carve out and recapitalize, with public funds,  local banking business essential to local financial intermediation
4. Resolve, wind down and close failing banks which have become property of their creditors.  International banks become just "national" when they collapse.  
5. Impose comprehensive capital controls as needed, since EEA States may, under certain circumstances, take protective measures that restrict the free movement of capital.
6. Ring fence the sovereign from bank problems and vice versa, avoid socializing private losses
Iceland Current Account to GDP
7. Ask for a referendum vote if taxpayers are being asked to absorb great losses (ex 3% of GDP).  Icelandic voters said NO!  Small country, big courage.  
8. Focus on the balance of payments and on moderating CAB current account deficits and capital inflows AND outflows 
9. Reinforce banking regulation, especially in small and relatively defenseless but financially integrated countries 
10.  Of course, it would have been better to avoid the "hot money" capital inflows to begin with.
Iceland, the little country that could!
Iceland is a member of the EEA- European Economic Area  which also includes de EU countries.